- 5 Referring The Case Wilson Family Foundation What Are Two Methods To Evaluate The Attractiveness Of The Bonds 4 P 1 (19.31 KiB) Viewed 33 times
- 5 Referring The Case Wilson Family Foundation What Are Two Methods To Evaluate The Attractiveness Of The Bonds 4 P 2 (60.05 KiB) Viewed 33 times
Page 3 UVA-F-1899 O'Brien recognized that the article was suggesting two ways in which these company's bonds would be attractive. First, the shift in market demand from highly risky (non-investment-grade) bonds and longer-tenor bonds to the relatively better-rated and shorter-maturity bonds these companies offered might drive up the prices of these bonds and lower their required yields. Second, the discussions of each company suggested that they were not as risky as markets believed. In either case, the Foundation could benefit from holding the bonds. In terms of returns, the bonds would provide a yield that was higher than what was required (the rate of return on the bonds exceeded an appropriate risk-adjusted benchmark). In terms of prices, the bonds were selling below their true value (a purchaser would increase their wealth by buying the bonds at the current price). O'Brien's main concern as she sat down to do her analysis was whether the bonds were actually as mispriced as the article suggested. Changes in market demand may have already been accommodated in their prices. Furthermore, changes in bond ratings typically lagged behind price changes. O'Brien was convinced on one point, however. She believed the bond ratings on all three bonds were off by one full rating category-that the ALGT and GME bonds rated BB should have been rated BBB, and the WU bond rated BBB should have been rated A. As she worked through her analysis, she was confident that there was at least one opportunity--possibly two-worth pitching to the investment committee.